Navigant Research Blog

Germany’s energy policies have promoted strong growth for the country’s renewables industry and have served as guidelines for countries like the United States, Australia, and Canada in adopting similar laws. They have not, however, benefited German utilities.

Power generators in Germany are struggling as the combination of renewables and other Energiewende policies continue to shift the economics of the country’s power market. The result has been frightening drops in per-unit wholesale electricity prices, the proliferation of low-cost/high CO2-emitting generation resources, and desperate calls from utilities for policy reform to preserve capacity markets that will provide revenue stability.

Germany allows renewables to take priority on the grid. Because its energy market is deregulated, compensation for energy resources is set by supply and demand dynamics and marginal costs per unit. As a result, renewables flood the grid when they are available, which is mostly during daytime peak periods (when prices used to be the highest). But because the marginal cost per unit of renewable electricity is essentially zero, even when fossil fuel-powered resources are utilized, they are compensated at a much lower price than they have been in the past. That’s bad news for German utilities (which are surprisingly underinvested in renewables), as they have traditionally made most of their income by generating electricity. E.ON reported revenue losses of 14% compared to 2012, while RWE reported a loss for the first time in 50 years.

The Brown Stuff

One of the most noticeable consequences of this is the growth in coal consumption. Due to the intermittency of renewables, utilities are required to ensure sufficient backup power at all times. Since they are not guaranteed the ability to actually sell these reserves – and face low marginal profits when they do – they choose the most inexpensive generating option – usually coal. Currently, lignite (brown coal) provides about 25% of Germany’s energy supply, a figure that, according to the U.S. Energy Information Administration, is growing steadily year-over-year. This is unfortunate because it is the dirtiest fuel source in terms of CO2 emissions. Furthermore, plants take upwards of 6 to 8 hours to ramp up, which means that it is more cost-effective to keep them running at all times. But utilities claim that they must increase their use of lignite in order to maintain financial stability.

So what’s the answer? After so much push for renewables and dedication to reforming the energy industry in Germany, it doesn’t make sense for Chancellor Angela Merkel and German regulators to return to the status quo ante. Grasping the futility of seeking to reverse the Energiewende, utilities have proposed a number of market reforms. In particular, following France, there has been an increase in lobbying for the establishment of capacity markets that would guarantee utilities a source of income regardless of whether they actually sold their resources.

High Anxiety

Proponents argue that capacity markets would enable utilities to not only use cleaner fossil fuel sources, but also increase their investments in efficiency-related grid projects. And this makes sense; the Energiewende has proposed grid investments to decrease overall transmission and distribution losses and extend the reach of renewable resources (also promoting energy efficiency). In addition, the extension of demand response technologies (something that could also proliferate if curtailment is allowed to be sold as capacity) could ease some of the problems surrounding intermittency and high CO2 emissions from spinning reserves.

With anxiety rising among both utilities and regulators as the energy business in Germany becomes more and more disparate, it seems important to take a close look at establishing market mechanisms that simultaneously promote renewables and allow utilities and grid operators to maintain financial and operating stability while developing new revenue streams based on energy efficiency.

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While Great Britain marches on with its grand plan for a nationwide smart meter deployment, Germany has decided that a pragmatic approach is better suited to its energy strategy.

After a statement by the German Federal Ministry of Technology and Industry at the end of July, we now know that the country will not follow the European Commission’s program for 80% deployment by 2020. Instead, it will adopt a phased approach that will address its specific requirements around energy efficiency and renewable energy integration. Germany has stood alone among the Big 5 European Union (EU) countries in not having made a national commitment to the deployment of smart meters. In the absence of a comprehensive national policy, smart metering in Germany has been left to market forces and has thus been restricted to pilot projects and a few commercial offerings.

The European Commission required all countries that did not commit to a national program to produce a cost-benefit analysis justifying their decision and any alternative approach. In response to this requirement (12 months after the original deadline), the German government released a report commissioned from Ernst & Young: Cost-Benefit Analysis for the Comprehensive Use of Smart Metering. The report assesses several scenarios for smart meter deployment in Germany, including the EU model for deployment to 80% of households, a business-as-usual scenario driven by market forces and current metering legislation, and a modified rollout based on amendments to that legislation.

Roll-Out Scenario Plus

Under current rules, new buildings and major renovations, customers with an annual consumption of more than 6 megawatts (MW), and new sites producing more than 7 megawatt-hours (MWh) of distributed generation (DG) must have an intelligent meter. The report estimates that by 2022 these measures alone will only extend smart meter coverage to around 23% of the total German market, which at around 48 million meters is the largest in the EU.

The Ernst & Young report determines that smart meters will provide little benefit to small consumers. This, along with factors such as differential regional requirements, apparently undermines the case for a rollout to 80% of households. The report does recognize the role smart meters can play in supporting the restructuring of the German energy market around renewable energy and in lowering overall energy consumption. It recommends an alternative approach called the Roll-Out Scenario Plus, which involves some amendments to current legislation to require smart meters for smaller DG sites and areas where grid conditions necessitate urgent action (e.g., where there is a large amount of renewable energy feeding into the distribution network). It involves the deployment of both smart meters (with two-way communications capabilities) and intelligent meters without the communications capabilities. This approach would create a market for around 24 million new meters by 2029, with an estimated 50% of those being smart meters.

A Qualified Yes

The German government is not required to follow this plan, but the Ministry of Technology & Industry has reacted positively, noting that the findings “show that we in Germany need to design our roll-out of smart metering systems in a targeted fashion which meets the needs of our energy reforms.”

The German assessment is not as positive as many in the smart metering industry had hoped, but it’s not a rejection of smart meters, either. The value of smart meters for large consumers and for addressing critical grid management issues is clear. The new plan presents a balanced approach that is tailored to the particular requirements and context of the Germany energy strategy. It should be welcomed.